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Little impact in US seen from new iron ore pricing agreement- 05 Apr 10

DENVER - New international agreements that will raise iron-ore prices are expected to have little impact on the prices U.S. consumers pay for products made with steel.

The price of steel has been rising steadily for the past 10 months. Analysts say any increases stemming from the new international contracts shouldn't impact U.S. manufacturers because they get most of their supply domestically.

"We've actually seen steel prices more than double since last May and it's had no impact on inflation because steel's such a small part of the economy," Steel Market Intelligence analyst Michelle Applebaum said.

For example, it might cost an automaker $900 in steel for a new car. If that increases to $1,000, it is still not the highest cost of materials in a $25,000 car, she noted.

Three major iron ore producers, Vale, BHP Billiton Ltd. and Rio Tinto have negotiated a pricing system with some global steel producers, primarily in Asia. They will set prices quarterly instead of annually, which will give them more flexibility in determining future prices.

John Anton, director of steel services for IHS Global Insight, said quarterly iron-ore contracts could swing both ways, depending on spot market prices. For example, iron ore spot prices average about $150 a metric ton, while the new contracts reportedly have averaged $105 a metric ton to $110 a metric ton, he said. The previous contract price was around $60 per metric ton under the annual benchmarking formula.

"Even with the contract price increase, in general, not in every case, but in general, it's still well below the current spot price," he said.

In the U.S., iron ore contracts are negotiated in annual or multiyear contracts. They are not disclosed publicly.

The new pricing system has angered European steel makers who want the European Union to conduct an antitrust probe of the three iron ore producers, claiming the change will mean price increases of more than 80 per cent. European car makers and engineering companies also complained that higher costs for iron ore could harm their businesses.

Apr 5, 2010 08:35
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